Professional Documents
Culture Documents
Maintenance
Outsourcing
Ben Stevens
ben@ omdec.com
www.omdec.com
www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 1
Agenda
• Why Outsource?
• The Steps in Outsourcing
• What to Outsource
• The Deal
• Performance management
• Service Levels
• Pricing
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 2
What is Outsourcing?
• Definition
– Paying another company to do part of your
own company’s normal work
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 3
Why?
Why Outsource?
• Improve Business Performance
• Costs of Services
• Quality of Services
• Manage resource demand peaks
• Take advantage of external specialist skills and
experience
• Management Focus
• Image
• Head count
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 4
Why?
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 5
Why?
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 6
Why?
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 9
Why?
Live Example - 1
The contract for mechanical maintenance
services was signed about 20 years ago, but is
regularly reviewed.
The Client’s Comments
– Transfer people management issues to service
provider.
– Cost is less than doing it “in-house”
– Flexibility in adjusting the size of the workforce
– Management can better focus on other critical
issues
www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 10
Why?
Live Example - 2
• Service provider supplies a web based CMMS
service hosted on third party servers; Clients
access the application using an internet browser
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 12
The Steps in Outsourcing
1: Analyse 4: Plan
3: Select
Needs and 2: Define Transition
Outsourcing
Service “The Deal” And
Company
availability Implement
5: Performance
Monitoring
Feedback
and contract
optimisation
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 13
1: Analyse
Needs and
Service
availability
Overview of Outsourcing Process
• Outsourcing is not automatically right for
everyone, all of the time.
• About 50% conclude that outsourcing is not
appropriate for their organization.
– the process must have exits at certain points.
• Time-consuming
• Early planning will have the greatest impact
on success
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 14
1: Analyse
Needs and
Service
What to Outsource?
availability
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 15
1: Analyse
Needs and
Service
availability
What to Outsource?
• Generic activities are:
– Common to multiple organizations.
– Typically routine activities.
– Can be technically complex.
– Can generally be delivered at a lower cost base
through use of scale, skill and technology by
specialists
• Unique activities:
– Only we know how to do
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 16
1: Analyse
Needs and
Service
availability
What to Outsource? Other Requirements
• To be successfully delivered by a third party
organization, the activity must be:
– Capable of being well defined and “separated”
from the organization.
– Measurable, and manageable at “arm’s length”
• Can write an effective contract.
– Readily provided by established suppliers in a
competitive market place for outsourcing.
– Not a competitive advantage,
… and not required to be in house for risk
management.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 17
1: Analyse
Needs and
Service
availability
What to Outsource? Other Factors
• Potential Issues / Risks
– Organizational
– Union Relations
– Legal / Regulatory
– Risk Management
– Public Policy / Public Relations Perspective
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 18
1: Analyse
Needs and
Service
availability
Activity Matrix - who does what?
Plan work Execute Close Work Materials
orders Work Orders Orders
Line 3
Total
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 21
1: Analyse
Needs and
Service
Defining Activities
availability
Constructing a Baseline
– Develop a five year business plan for self-
provision.
• Included expected any improvements (technology,
staffing, processes etc.)
• Reconcile with budgets (activity based costing) to
identify all costs.
– Collect all relevant metrics and identify cost
drivers.
• Number of work orders, number of staff, number of
invoices to be processed, number of square feet,
operating hours, production output, etc.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 24
2: Define
“The Deal”
Initial Vendor Requests
For Proposal
• Identify activity groups to be considered for
outsourcing
– Functions, frequency, location, lead times
• Clearly allocate responsibilities:
– Outsourced;
– Retained;
– Shared - Need to clearly delineate responsibilities.
• Identify dependencies in activities:
– Affects accountability.
– Affects how we construct service levels.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 25
2: Define
“The Deal”
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 26
2: Define
“The Deal”
• All inter-linked
– Change in one, will cause a change in the others.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 27
2: Define
“The Deal”
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 29
2: Define
“The Deal”
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 30
2: Define
“The Deal”
Components of Service Level
Agreements
• What services are being measured. (KPI’s)
• What targets must be achieved.
• Who measures these services.
• How these services are measured.
• How often these services are measured.
• What is the severity of impact to client, if
service levels are not met.
• And therefore what is the penalty
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 31
2: Define
“The Deal”
Examples
• Examples: 4 hour response time for 98% of service
requests;
• Mean Time Between Failure of 5,000 hours on
critical equipment;
• MTTR not to exceed 4 hours on critical equipment
etc.
– How many KPI’s? How do KPI’s integrate?
– Must be based on history and be achievable
– Must be within the service provider’s control
– Link to continuous improvement?
– Link to price / service points in the market place.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 32
What should you outsource?
Services you should consider Suggested Service Levels
outsourcing
1
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 33
3: Select
Outsourcing
Company
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 34
Selecting the Right Vendor
Minimum Price/Quality Budget
Quality 5 Function Cap
Price
2
Too high cost
Too high cost 3N Quality OK
Too low quality eg
ot
ia
Within Budget te Within Budget
Too low quality 4 Quality OK
Target Zone
1
Quality = (Experience
Vendor 1 + Resources)
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 35
Negotiating Options
D. Eliminate Tasks A. Lower price
Price 5
2 B. Increase Budget
5a
3
2a
4a
4 E. Add more experience
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 38
4: Plan
Transition
And
Contract Management
Implement
• Grace Period:
– Normal to establish a short “grace period” at the
start of a contract.
• To address potential difficulties of implementing service
levels, and problems with availability of information.
• During the grace period, service levels are measured but
no remedies are applied.
• This allows the vendor to develop a measurement and
reporting routine.
• Base-line measure is established at the end of the grace
period.
– Need to balance with the imperative of continued
production
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 39
5: Performance
Management
Contract Management
• Monitor and Report:
– Reporting is a primary contract management tool.
– Obligation to monitor and report on service levels
must lie with the service provider.
– Customer rights
• Change priorities with due notice
• Plan and schedule extra work (for extra pay)
• Request additional detail
• Right to audit work, equipment condition and charges
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 40
5: Performance
Management
Contract Management
• Contract Change Mechanism:
– Contract must make provisions to change:
• Target service levels
• Schedules
• Task content and frequency
• Inspection frequency
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 41
5: Performance
Management
Contract Management
• Dispute resolution
– Keep it simple, keep it out of the courts
– Dispute resolution mechanism should focus on
remedies for not achieving Service levels
– Can involve third-party arbitration.
– Increases need to quantifiable measures and
objective non-ambiguous terms and conditions, to
reduce interpretation issues.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 42
5: Performance
Management
Contract Management
• Severity of Consequence:
– Understand consequences to the organization of the
service provider not meeting service levels.
– Generally use three levels / tiers of severity:
• Catastrophic
• Severe - causes business disruption
• Annoyance - linked to the business mission and
consequences.
– Financial remedies specified in the contract must be
tied to the severity of the consequence.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 43
5: Performance
Management
Contract Management
• Enforcement:
– Service Levels must have an enforcement mechanism,
in the event that service levels are not met.
– This should be a combination of management cure,
followed by financial remedies.
• Escalation:
– Looking to identify and prevent an ongoing trend in
poor service.
– When a service level breach occurs, the service
provider should present a plan to eliminate problem.
– This must be followed by an escalating financial
remedy, for successive incidents of poor service.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 44
5: Performance
Management
Contract Management
Penalties versus Incentives:
– Balance between penalizing for sub-standard
performance and making it not worthwhile the
vendor continuing
– Leave service provider with desire to continue and
improve service levels.
– Off-set penalties with credits for above standard
performance
– Make sure bonuses are available for high
performance
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 45
5: Performance
Management
Contract Management - Termination
Customer’s right to terminate:
• For catastrophic service level breaches
• where it is clear that the vendor is unable to cure the
problem.
– Vendor’s right to terminate
• for late payment
• changing the rules
• inadequate notice for work
– Customer must have Plan B
– Vendor must provide transition assistance at termination
– The termination clause should reflect balance and
fairness with obligations and responsibilities
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 46
5: Performance
Management
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 47
5: Performance
Management
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 48
5: Performance
Management
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 50
5: Performance
Management
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 51
5: Performance
Management
• Information Technology
– General IT Service
• Response Time for Issue Resolution
• System Availability
• Subjective Measures
– ASP (Application Service Provider)
• System Responsiveness / Speed
– Via Internet
• System Availability
• First Time Capability on Problem Resolution
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 52
Some
Assumptions
Outsourcing Requirements
• Access to information (through CMMS?)
• Accuracy and speed of reporting
• Speed of decision-making
• Quality of planning cycle
• Equipment condition measurement
• Materials planning and delivery cycle
• Acceptance by current staff (maintenance
and operations)
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 53
Pricing
Pricing Options
• Cost-plus contract
• Management fee contract
• Unit price contract:
• Fixed price for term contract:
• Fixed price for term contract with
performance incentive
BUT
• Zero margin = marginal performance
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 54
Pricing
Pricing Options
- Fixed price for term contract
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 61
Other
Contract Options
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 62
Other
Contract Options
Contract Term:
– Outsourcing contracts typically are long term (five
to ten years).
– Service providers require time to recoup
investments made in process improvements and
technology.
– BUT longer terms mean the contract must be
flexible.
– Change management, benchmarking to market
and continuous improvement clauses are
important.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 63
Other
Contract Options
Asset Condition
– Asset degradation risk.
– Is the service provider expected to manage the
condition of the assets so that they are returned
“in same condition, except for normal wear and
tear”?:
– Do not want the service provider to find savings by
omitting preventive maintenance.
– Especially critical in fixed fee contracts
– Important where service providers have incentives
to find savings.
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 65
Other
Contract Options
Building a “Win-Win”
– Both parties must have more to gain by fulfilling the contract,
than by pulling apart.
– Select the correct scope going in to the contract.
– The service provider’s primary motivation is price and
margin.
– The customer’s is cost and reliability
– Continuous improvement incentives should ensure that
the vendor delivers in those areas that are improtant to
the customer.
– Contracts must allow for changes in scope and service
levels, and therefore price.
– Dispute resolution must be clear - an escalating
process, followed by arbitration.
– Termination must be fair www.ipamc.org
Ben Stevens, OMDEC – “Maintenance Outsourcing” 66
Pricing
• Which pricing approach makes most
sense for you.
• Why?
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 67
Thank you for your attention
• Any questions….
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Ben Stevens, OMDEC – “Maintenance Outsourcing” 68